Management, Risk

Managing ESG

We’re entering a very different corporate era. Go back thirty years, and the focus at the executive level was almost exclusively on financial results. Today, however, investors are much more concerned with the corporate responsibility and sustainability of firms.

With the changing priorities of owners and asset managers, executives have had to change tack. While they must still keep one eye firmly on profitability, they also now have to consider a more holistic picture of the brand. Issues like the environment, hiring practices, data protection, and corporate governance have all taken center stage.

The question for the C-suite now is how to deal with these changes in cultural norms. For many people at the top of business, ESG (environmental, social, governance) policy is yet another attempt by progressives to undermine the efficacy of capitalism and the market mechanism, but that is not how many see it, even those prefer free enterprise. It turns out that prioritizing things like sustainability, labor relations, and diversity can be beneficial for firms on a purely financial level.

Research from a variety of academic and corporate sources supports this idea. Companies that score highly on ERG-related metrics tend to outperform their peers. A study by George Serafeim, Bob Eccles, and Ioannis Ioannou, for instance, found that stock returns in high-sustainability companies were substantially higher than those with a low rating. It pays, therefore, to focus on ESG issues, even if they appear to run counter to the interests of the business owners.

Arguably, there is a shift away from pure materiality. Company owners do still want their equity to generate handsome returns, but they also value non-financial metrics, such as how their firms treat their people and the environment. The majority of shareholders want companies to do good in the world, even if it means accepting upfront costs.

As an executive, therefore, it’s your responsibility to bring this new ESG-centric worldview into existence in your organization. But how?

In this paper, we’re going to take a deep dive into some of the strategies you can use, providing actionable content that you can then apply. By the end of the discussion, you’ll have a clear understanding of the steps you need to take.

Actionable And Practical Ideas For Implementing ESG In Your Organization

ESG breaks down into three distinct categories: environmental, social, and governance. We’re going to take a look at issues contained within each group in turn because ESG issues tend to be industry-specific. The coal industry, for instance, needs to focus mainly on “E” or environmental concerns because of the nature of what it does. The banking sector, by contrast, will necessarily focus more on “G” as governance is traditionally a sticking point. Most firms have multiple ESG objectives with significant overlap between categories.

ESG concerns are holistic and generally require a top-down approach that transforms the company at every level. Thus, you may need to concentrate on all three pillars to effect change in your organization.

Committing to ESG offers companies a plethora of benefits. Firms that take control of their ESG policy with gusto reduce the chance of brand-damaging boycotts, negative publicity campaigns, and legal action. They also enhance worker productivity, happiness, morale, and community support.

So, without further ado, let’s take a look at some actionable steps you can take to implement ESG in your organization.

Environment

Here are some strategies that you can use to improve the “E” in ESG:

Adjust Your Supply Chain

As an executive, you may feel like a small cog in a much larger industrial machine. Sure, your company adds to the burden on the environment, but your actual operations only play a minor role. The majority of the damage is done upstream by your suppliers. While your goods embody the consequences of environmental devastation, there’s very little you can do about it – or so you think.

It turns out, however, that companies in this predicament have a variety of options.

The first is to put pressure on your suppliers. Start by identifying problems in their business models and suggest steps that they might take to fix them. For instance, if you use a supplier that makes use of a material that leads to the destruction of the rainforest, you can strongly suggest that they switch to alternatives. Point out that other companies in the industry have already made the change and that they must too if they want to stay up to date with the needs of modern ESG-aware companies. You could also highlight the fact that your suppliers’ competitors use fewer heavy metals or less energy in their production methods. Where possible, try to offer a win-win situation. Suggest that by improving production processes, your suppliers will be able to serve the environment while also cutting their costs.

If your existing suppliers don’t comply with your needs, reward new ones that will. Today some numerous sustainable suppliers and vendors have openly committed to solving environmental externalities on the operational level. For instance, if you operate a food business and require packaging, switch from your regular plastic-heavy supplier to a range of eco-friendly alternatives that offer disposable, biodegradable options.

If adjusting your supply chain is not possible, or there are no alternatives, you might want to consider vertical integration. Bringing the production of the most environmentally damaging aspects of operations in-house could have critical positive ramifications.

Create A Green Energy Strategy

The news on the green energy front is overwhelmingly positive for business. Renewable energy technologies are collapsing in price, and have now reached a critical tipping point where they’re becoming less expensive than traditional alternatives. It behooves companies, therefore, to develop sustainable energy plans that enable them to reduce their carbon footprint.

There are several ways to do this. First, you can install sustainable energy generation on-site. Solar panels are the most popular approach, but some firms use hydro and wind when the cost-benefit is superior. While you can invest in battery storage (to provide stored up renewable energy when the wind isn’t blowing, and the sun isn’t shining), most companies take a “carbon-neutral” approach. In other words, sometimes they sell their energy to the grid, displacing fossil-fuel electricity generation, and at other times they buy back, neutralizing their impact on CO2 production.

The second path towards green energy is to source your electricity from green suppliers. Companies that cannot install renewable capacity on their premises may be able to source it from generators which only rely on fossil fuels as a last-ditch backup.

Finally, if neither of those is an option, there are numerous steps that you can take to make better use of the energy you do consume. Take a look at some of these actionable ideas:

  • Install lights that automatically switch off when not in use
  • Transition your organization away from using incandescent and halogen light bulbs and towards LEDs alternatives
  • Use natural sunlight to light workstations where possible
  • Create IT networks and terminals that automatically power down while not in use
  • Cut your reliance on peak demand to reduce your overall consumption of fossil fuels. Concentrate your most energy-intensive operations during the middle of the day when your solar panels can collect and distribute the most energy.
  • Purchase only high energy star-rated equipment. (For instance, choose low power consumption processors and GPUs for the computers in your office).
  • Conduct an energy audit to find out where you’re using your power and whether your current consumption levels are necessary for the operation of your business

Delegate Environmental Strategy

As an executive, you may not have all the information that you need to make informed environmental decisions. In this case, it makes sense to delegate.

A “sustainability leader” is somebody in your organization who can lead teams and advocate for sustainable business practices across departments.

For instance, your HR people may still be using paper-based systems to arrange employee contracts, pay, vacations, and applications. Paper has a high environmental impact, so your sustainability officer might introduce your people to software that manages HR functions, such as payroll and recruiting, cutting your resource usage.

A sustainability officer can also help your company decide on strategy at the boardroom level. You can rely on their expertise when considering things like constructing new offices, work-from-home policies, and choosing new suppliers.

Improve Employee Commute Habits

Traveling to work by car is bad for the environment, but something that millions of workers do every day. Companies, however, are not powerless in this matter.

Take Panasonic, for instance. The electronics company realized that if it wanted to be more sustainable, it had to reduce the number of people commuting to work by car. The firm decided, therefore, to relocate one of its offices next to Newark Penn Station, a major transport hub. Following the relocation, it reported a 50 percent fall in the number of people using their cars to get to the office from a massive 86 percent to just 36 percent almost overnight.

What was interesting about the Panasonic episode is that the executives didn’t do anything to “reeducate” workers. The simple change in location was all that was the only nudge employees needed to shift from private vehicles to public transport. There was no need for awkward conversations.

Social

The following strategies will show you how to improve the “S” component of ESG:

Institute Objective Internal Assessment Programs To Promote Diverse Candidates To Leadership Positions

As an executive, it can be tempting to go to the labor market whenever you need somebody with specific skills.

The most ESG-aware companies, however, try to promote from within wherever possible. The reasons for this are clear: it helps motivate employees, improves morale, and ensures that you’re able to get access to a more diverse talent pool than if you decide to recruit externally.

Top executives know that diversity is a strength. When people have different views and backgrounds, they’re better able to solve problems and identify the needs of consumers. The problem, however, is creating systems in the business that permit this to happen.

One approach is to initiate internal “safeguarded” assessment programs to objectively measure the performance of employees and recommend them as promotion candidates. If you operate a small business, you can create a plan yourself. Executives at more substantial companies can hand over responsibility to HR and department leaders.

These programs tend to work best with constant C-suite oversight. You want to make sure that only genuinely talented members of your organization from diverse backgrounds are promoted to leadership candidate status, and not just people who are on friendly drinking terms with their line managers.

Create A Comprehensive Labor Relations Strategy

Many companies can find themselves in trouble when labor relations go sour. When employees don’t like their work, it can put people off from joining the firm, sabotage your operations, lead to legal action, and lower morale. In extreme circumstances, you could face industrial action.

Executives, therefore, need to create a comprehensive labor relations strategy, but how?

Here are some actionable steps that you might want to take to improve the bond you have with your employees:

  • Initiate consultations. Improvements in labor relations always start with a consultation. As an executive, you’re not always aware of the conditions on the ground for rank-and-file employees. While you might have a noble company statement, problems with management lower down the corporate hierarchy can lead to a souring of relationships. Ask your employees what isn’t working for them and why they’re unhappy with their jobs. Sometimes you’ll need to revamp your management, but not always. Often, small changes can make a big difference in morale and productivity.
  • Communicate company mission. Workers don’t want to feel as if they’re stuck in a rut, mindlessly pushing papers around the office, disconnected from their desire to create genuine value. It’s critical, therefore, that executives develop a sense of mission and purpose across the entire organization. If individual employees know what they’re working towards, they’re much more likely to put in the effort required to get the job done. It’s a win-win outcome. Workers feel more satisfied, and management improves output per worker.
  • Actively promote work-life balance. Regular people (who aren’t ultra-committed corporate executives) can usually only work productively for about 50 hours per week. Additional overtime cuts into their overall productivity. Research suggests that organizations that actively support work-life balance reduce casual sickness absence, improve employee productivity, improve staff morale, reduce staff turnover, and make recruitment easier. The benefits, therefore, are extraordinary. Fortunately, there is a raft of things you can do to promote work-life balance as an employer. These include providing childcare allowances, childcare voucher schemes, offering unpaid leave during school holidays, job-sharing, better maternity leave, and benefits, paid paternity leave, paid “special carer” leave, and guaranteed time off over the holidays for employees with families.
  • Congratulate employees for a job well done. Recognizing employees for the effort that they make in the course of their work is vital for a happy, healthy, and productive workforce. It is not, unfortunately, an enshrined aspect of many corporate cultures despite being the cheapest and easiest-to-implement labor relations measure that you can take by far. Popular ideas for recognizing employees include training management on how to affirm colleagues, holding award ceremonies, and instructing your management team to highly employees who “go above and beyond the call of duty.”
  • Offer career development opportunities. Most workers in your organization want to feel as if their careers are going somewhere. They don’t want to toil under the belief that they’ll still be doing the same dull work they do right now in twenty years. Career development opportunities are, therefore, a vital palliative for many workers. When onboarding new employees, make them aware of the advancement opportunities available in the company. Create a program for those who display the aptitude to develop into leaders using key performance metrics and qualitative assessments. Remember, just because an employee is good at their job, doesn’t mean that they will necessarily perform well at the leadership level.

Conduct Human Rights Risk Assessments Across Your Supply Chain

Upholding the human rights of people enmeshed in your overseas supply chain is a fundamental component of ESG. Companies that sell products on the back of slave labor, child labor, or labor from sweatshops, run the risk of negative publicity and falling revenues.

As an executive, the responsibility to combat human rights abuses in your supply chain falls on you, but what practical steps can you take to ensure that you uphold international standards and discourage violations?

First, conduct a risk assessment to figure out whether the benefits of relying on third-party workers for the viability of your enterprise justifies the human rights and business risks. Ideally, your risk assessment of suppliers and contractors should investigate their labor practices, including a thorough evaluation of their recruiting and hiring. Your suppliers should be transparent about their labor practices. If they are not, you can demand that a full risk assessment become a precondition for winning a contractual relationship. You may also wish to implement independent auditing of their actual labor practices to ensure that they remain in line with your corporate standards.

Second, creating a corporate statement of labor principles and human rights that sits on your website (or accompanies any contractual relationships you enter with third parties) can make your position clear. The statement should expressly state that your company is committed to upholding certain human rights throughout the supply chain. It should also spell out clear consequences for non-compliance.

Third, you can begin training your employees to sniff out possible human rights abuses in your supply chain. Often it is workers on the ground who are best able to alert you to problems.

Finally, as an executive, you have significant power to create a cultural change at every level of your organization. It should be clear to everyone across your firm that human rights abuses are not acceptable and that there are no excuses. If a vendor doesn’t attain your standards, you immediately move towards discipline and cutting off relationships.

Develop Your Community Relations Strategy

If businesses want to be successful long-term, they need to foster positive relationships with the communities in which they operate, but how?

One idea is to partner with or sponsor a good cause. For instance, teaming up with a local college or university can be a great way to give back to your community. With your expertise, you could create an event to develop the skills of young people. You could also offer scholarships with the top students winning internships at your company over the summer break.

If you wish, you can also make direct donations. Many ESG-aware organizations offer money for meaningful local community projects that the state has not been able to provide. For instance, you could find a public park in a deprived area and publicise the fact that you paid for the facilities out of profits that would have gone to shareholders.

Other ideas include hosting charity events for a good cause or doing periodic volunteering as a company – you get the picture. Your job is to ingratiate yourself with the community, not just so that they will use your services, but also to fulfill your social role.

Begin An Employee Wellness Program

Burnout and poor health are two leading reasons why so many companies fail to hit their productivity targets. Their people just aren’t at their best.

Poor health in the workplace can lead to a host of problems, including higher insurance premiums, lower productivity, higher rates of absenteeism, and reduced creativity. But with a wellness program, you can counteract all these negatives while also improving employee satisfaction.

What does an effective wellness program involve?

Fundamentally, a wellness program is anything that improves the physical or mental wellbeing of the people who work in your organization. Knowing what changes to make, however, is not widely known among corporate executives. Wellness programs are not necessarily offering yoga classes at lunchtime (although that can help). Their scope goes well beyond that.

Food choices should be at the center of any wellness program. This is why progressive companies now focus on providing their colleagues with low-cost healthy food in their canteens, emphasizing legumes, whole grains, fruits, and vegetables. Where possible, they steer away from animal products, refined sugars and oils, and carbonated soda. If possible, they also try to put a stop to “cake culture” and replace office snacks with nourishing alternatives.

Wellness, however, isn’t restricted to food choices. Research by Central Michigan University found that the presence of a dog at the office helps to improve collaboration. Far from being a distraction, opening up the office to furry friends may help to improve the bottom line. You may, therefore, want to have an office dog or offer pets at work policy.

Guided meditation is another option. Here you provide your colleagues with an instructor who will take them through various breathing exercises and mental techniques that prepare them for the stresses of the day. Regular meditation can lower cortisol and blood pressure, helping to improve overall feelings of wellbeing.

Governance

Issues relating to governance are high on the ESG agenda. Here are some actionable strategies that will help you in this realm:

Invest In Internal Systems That Will Measure ESG Performance

The vast majority of companies have sophisticated internal structures for measuring financial performance, but relatively few allocate the same level of resources to measure their ESG performance. The main problem is integration. While many companies use boutique solutions for measuring individual metrics, such as CO2 emissions and employee retention, very few amalgamate these disparate figures into a statistic that provides stakeholders with the big picture. Thus, fragmented ESG data makes it hard for executives to get a handle on what is actually happening in their companies. The C-suite would like easy-to-interpret statistics to show to investors and the wider public, but they can be challenging to find.

Fortunately, several organizations are developing standard metrics that you can use to get a good idea of how your company is performing compared to competitors in your industry. Three of these – The Global Initiative For Sustainability Rankings (GISR), The Sustainability Accounting Standards Board (SASB), and The Global Reporting Initiative (GRI) – all offer a way for you to measure the performance of your firm, with others look set to follow. Once you have the figures, you can incorporate them into your standard reporting, thus helping you garner the attention of sustainability-focused money managers.

As an executive, you can also start putting pressure on financial reporting software vendors to include ESG functions. Make it clear to them that you want tools that allow you to measure your performance in the environmental, social, and governance realms. While many developers are already trying to bring these innovations to market, additional pressure from customers will accelerate this process.

Third, you can press your audit partners to consider ESG issues on equal footing with financial considerations.

While the IT challenges and liability concerns are an issue, the overall benefit of measuring ESG performance should be positive. Investors will have evidence of your level of ESG awareness and be able to make decisions accordingly.

Engage With Shareholders

Both active and passive investors want to be able to invest in companies that they feel make a positive contribution to the world. For many, the concern is not so much how much of a return that they make (they already have enough money), but whether the mission of your business is aligned with their goals for society.

Sustainable investing is fast becoming synonymous with “investing” with numerous institutions and high-profile investors divesting of companies that they dislike, even in the face of substantial economic rewards.

Executives, therefore, should create a Statement of Purpose. The International Integrated Reporting Council broadly defines the document as a summary of how your organization will conduct itself in the context of the wider environment. It is your opportunity, therefore, to sell your ESG credentials to investors and progressive money managers who may not yet view your organization in a favorable light. You can use it to sell the idea that you’re taking active steps regarding your role in society, enhancing the positive benefits that your organization brings, while cutting the negatives.

You may also want to shift the emphasis of quarterly earnings calls. Too many companies focus on the short-term profitability of their enterprises, without considering ESG issues. Management, however, can choose to eliminate earnings guidance and replace it with meaningful ESG targets.

Link Corporate Compensation To ESG Metrics

Economists and people in business know that incentives are what makes the world go round. Without financial rewards in place, it is difficult to get people to change their behaviors in any meaningful or substantive way.

Cutting-edge companies, therefore, are now tying executive pay to ESG metrics instead of financial performance. Thanks to globalization and the current labor supply glut on the world stage, wages in many developed economies have remained flat for more than a decade. At the same time, the global economy as a whole has become a lot wealthier, with much of that increase going to the top one percent – mainly company executives.

Tying executive compensation to ESG metrics may, therefore, be an effective public relations strategy. Companies can point to the social good that their leaders bring as evidence for why they should be paid so much.

When choosing which ESG metrics to tie executive compensation, make sure that you select those that are related to your industry. Companies in the foodservice business, for instance, might want to link “volume of food waste” or “percentage of packaging recycled” to executive salaries. By contrast, those in the steel production industry might want to measure “percentage of inputs from ethical sources” or “CO2 production per 1,000 tonnes of steel.”

Conclusion

Managing ESG isn’t complicated, but it does require a new mindset. Executives must shift from thinking of themselves as stewards of the company to stewards of the company and everything with which it interacts. The more that companies can push ahead with their ESG policies, the more likely they are to succeed in the long term, both in terms of brand value and overall profitability.

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